United Utilities' Inflation-Proofed Dividend

In theory utilities are nice, smooth, sound-as-a-pound payers of debenture-like income. In reality a combination of government interference with pricing and reactive megalomania-- wanting to develop businesses beyond the regulator's clammy grasp-- has meant that quoted utes are erratic creatures.

Take UU. It has cut the dividend from year to year four times since 2000, with one complication due to its selling off its electricity supply offshoot and returning capital; the latest cut, in 2011, was 'rebasing' after HMG closed in.

The inflation-linked formula sounds nice but it only runs for five years at a time, and although water companies are natural monopolists, the hazards are as great to income as with franchised bus and train operators. In fact FirstGroup and Go-Ahead have more settled dividend histories than UU, National Grid or Severn Trent, despite offering no 'RPI-plus-x per cent' promises.

So the big yields on utes reflect not only dullness in the intrinsics of their trade (water ain't going to boom any time soon) but the oppression of a quango constantly hollering for more capspend to clean up sources, itself pressed by politicians not to let constituents' water bills take off.

As always, between these 'stakeholders' and a rapacious, empire-building or lax management, the hapless shareholders are the ones everybody else takes it out on. Not surprising that most have been ready to take the money and run, and why most of our gas, electricity and water (not to mention our public transport) is owned by foreigners.

The withering of the utilities sector is one of the great long-term failures of the Thatcherisation/Big Bang project. It did not help usher in a new generation of responsible, long-term shareholding Sids. It turns out to have been a mechanism for transferring vital public services from State control to that of aliens-- often State bodies in their own lands.

Luniversal,
"Not surprising that most have been ready to take the money and run, and why most of our gas, electricity and water (not to mention our public transport) is owned by foreigners."

Does Johnny Foreigner uses different criteria from us Brits when he buys his shares.
Is he right to do so?

If so, why?
If not, why not?

To illustrate Luniversal's point about United Utilities, here is the income record of a holding in the company that has been run in a capital-neutral way - i.e. whenever the company has made a payment that is not an ordinary dividend, it has been reinvested in the holding:

Nov.2000 - Nov.2001: £331
Nov.2001 - Nov.2002: £337
Nov.2002 - Nov.2003: £342
Nov.2003 - Nov.2004: £358
Nov.2004 - Nov.2005: £367
Nov.2005 - Nov.2006: £354
Nov.2006 - Nov.2007: £363
Nov.2007 - Nov.2008: £377
Nov.2008 - Nov.2009: £266
Nov.2009 - Nov.2010: £279
Nov.2010 - Nov.2011: £244
Nov.2011 - Nov.2012: £261

Sources: http://boards.fool.co.uk/chyp1-10-year-review-12094008.aspx, http://boards.fool.co.uk/chyp1-11-year-review-12407569.aspx and this year's dividend declarations.

The company has had an RPI+N% dividend policy throughout most (possibly all) of that period. But it's a policy more honoured in the breach than the observance: the cuts in 2009 and 2011 have more than wiped out all of the growing ahead of inflation, so that the investor has experienced more than a 20% reduction in income in nominal terms over the period, and much worse than that in real terms. (I haven't included the smaller reduction in 2005 in that list, by the way, as that may be a side-effect of how the portfolio concerned handled the company's two-stage rights issue back then: the complexity of that rights issue made rather more variation than usual possible in the outcomes of capital-neutral ways of handling it.)

I.e. investors would do well to be sceptical about the company's "inflation-proofed dividend": its record says that the dividend is inflation-proofed except when it isn't...

Gengulphus